Can I Discharge Tax Debts In Bankruptcy?
The answer is both yes and no. As you review the following information, keep in mind that Congress created the bankruptcy laws, and also has responsibility for taxation and funding the government. Because of this, there are many specific and technical rules relating to whether and when tax debts can be discharged in bankruptcy.
WHAT TAX DEBT CAN BE DISCHARGED IN BANKRUPTCY?
Income tax debts can be discharged in bankruptcy if:
- It is an income tax liability,
- You filed your income tax return at least 2 years before the date you file bankruptcy (though the IRS is now arguing in many states that if the tax return was not filed on time, it can not be discharged regardless of when it was filed);
- The tax return was not a commissioner-filed return;
- The date on which the tax return was last due (including any extensions) is more than 3 years before the date you file bankruptcy;
- There have been no assessments in the 240 days prior to the bankruptcy filing;
- You did not willfully evade taxes or commit tax fraud in your tax filing;
There are other conditions that are rarely applicable, so talk to us if you need to determine whether your tax debts can be discharged.
WHAT TAX DEBTS CANNOT BE DISCHARGED IN BANKRUPTCY?
Most other types of taxes cannot be discharged in bankruptcy. Any tax that is required to be collected from a transaction or payment, such as sales taxes or employee withholding taxes, cannot be discharged. Property tax debts can not be discharged in bankruptcy. And finally, any income tax that does not meet all of the qualifications listed above cannot be discharged.
WHAT CAN A CHAPTER 13 DO WITH TAX DEBTS?
While Chapter 7 can only discharge or not discharge a debt, Chapter 13 can provide significant tax relief. Initially, filing a Chapter 13 stops tax authorities from garnishing wages and levying bank accounts. Income tax debts that qualify for discharge can be discharged in a Chapter 13. And most non-dischargeable tax debts qualify for “priority” treatment in the Chapter 13, which means that the Chapter 13 plan will pay priority tax debts 100% in the Chapter 13 plan. Thus, with the exception of late-filed old tax debts that are not dischargeable and don’t qualify for priority status, your tax debts should have either been paid or discharged at the end. There is one catch, though: Interest on your tax debt that accrues between the date your case is filed and the date the Chapter 13 pays off the tax debt is not itself discharged and cannot be paid in the Chapter 13 plan; the IRS or State will send you a bill for this interest after the completion of your Chapter 13 plan.
Filing Chapter 13 also stops property tax authorities and tax liens from foreclosing (if the property hasn’t actually been foreclosed upon yet). To protect your property during the Chapter 13, your Chapter 13 plan must provide for payment of delinquent taxes and tax liens in full through the Chapter 13 plan, and you must pay all post-petition tax payments when due.
WHAT ABOUT TAX LIENS?
A tax lien is a secured claim against all of a debtor’s property obtained by the IRS or State taxing authority. Bankruptcy does not itself remove a tax lien – in other words, after discharge, the tax lien will remain as a lien on your property. Sometimes after a bankruptcy is discharged, the tax authority will voluntarily release a tax lien if it is apparent that the debtor has no nonexempt property to secure the lien.
WHAT CAN I DO TO GET STARTED?
In order to file a Chapter 7 bankruptcy, you must have filed your tax returns for the last 2 tax years that were due before you file bankruptcy. In order to file a Chapter 13 bankruptcy, you must have filed your tax returns for the last 4 tax years that were due before you file bankruptcy.
If you have not filed taxes for many years, you should consult with a tax professional to find out if, when, and how you should file those missed taxes.
If you have tax debts, it is a good idea to get a tax transcript from the IRS for the years in question. The most helpful tax transcript is the Tax Account Transcript. You can request transcripts online at here or by completing and mailing or faxing form 4506-T to the IRS. You should also get a tax transcript from state tax authorities.